- Transitional challenges posed by GST, Rupee appreciation, sector-specific issues to weigh on GVA growth in Q1 FY2018
ICRA expects the growth of the Indian gross value added (GVA) at basic prices in year-on-year (YoY) terms to moderate to 6.3% in Q1 FY2018 from 7.6% in Q1 FY2017, with a slowdown in expansion of the industry (to 3.9% from 7.4%) and services (to 8.2% from 9.0%) outweighing the impact of the anticipated pickup in agriculture (to 4.0% from 2.5%).
Aditi Nayar, Principal Economist, ICRA Limited, said: “The disruption in production schedules and discounts offered ahead of the implementation of the goods and services tax (GST); the impact of the appreciation of the INR relative to the USD on export earnings; and specific issues related to sectors such as banking and telecom are likely to weigh upon the GVA growth in Q1 FY2018, offsetting the impact of the up-fronting of the Central Government’s expenditure and a healthy rabi harvest of several crops. ICRA expects the GVA growth to decline to 6.3% in Q1 FY2018 from 7.6% in Q1 FY2017, while improving in sequential quarters, relative to the initial estimate of 5.6% for Q4 FY2017.”
“Moreover, ICRA estimates the growth of the GVA at basic prices, excluding agriculture, forestry and fishing, and public administration, defence and other services, at 4.8% in Q1 FY2018, in line with the modest 4.8% rise in gross corporate income tax collections,” Ms. Nayar added.
Industrial growth is expected to slow to a modest 3.9% in Q1 FY2018 from the healthy 7.4% in Q1 FY2017, led by manufacturing, electricity, gas, water supply and other utility services and construction. The Index of Industrial Production (IIP) indicates that production growth in the manufacturing sector moderated sharply to 1.8% in Q1 FY2018 from 6.7% in Q1 FY2017, in an effort to reduce inventories, ahead of the transition to the GST. Moreover, discounts offered to shrink inventories ahead of the GST would have weighed upon earnings growth in that quarter. Additionally, the expansion of electricity generation halved to 4.9% in Q1 FY2018 from the robust 10.0% in Q1 FY2017, according to the core sector growth. Furthermore, ICRA expects growth of the construction GVA to print at a subdued ~2.0% in Q1 FY2018 (+3.1% in Q1 FY2017), in line with the 1.9% rise in the infrastructure/construction goods index of the IIP for that quarter, given the lingering impact of the note ban and the introduction of the RERA on this sector.
ICRA expects the services sector growth to ease to 8.2% in Q1 FY2018 from 9.0% in Q1 FY2017, led by the weak trend in earnings, displayed by two of the key sub-sectors, namely banks and telecom, as well as the sluggish momentum recorded by non-food bank credit, commercial paper etc. However, services sector growth would have been boosted by the 26.8% expansion in the Central Government’s non-interest revenue expenditure in that quarter, following the frontloading of spending after the early presentation of the Union Budget for FY2018. Other indicators recording a healthy growth in Q1 FY2018 include air cargo and passenger traffic, foreign tourist arrivals and petrol consumption.
The Fourth Advance Estimates of Crop Production forecast a healthy growth in the rabi output of pulses (+25.0%), oilseeds (+13.1%), coarse cereals (+10.7%) and wheat (+6.6%). On the back of this healthy rabi outturn, ICRA expects the growth of agriculture, forestry and fishing to improve to 4.0% in Q1 FY2018 from 2.5% in Q1 FY2017.
ICRA expects GDP to rise by 6.1% in YoY terms in Q1 FY2018, lower than the GVA expansion for that quarter (ICRA exp: 6.3%), led by an anticipated slowdown in growth of taxes on products less subsidies on products. This is likely to follow from the sharp increase in the Government of India’s subsidy expenditure in the just-concluded quarter, even as indirect taxes recorded a healthy growth. While the average CPI inflation eased to 2.2% in Q1 FY2018 from 5.7% in Q1 FY2017, the average WPI inflation posted a turnaround (to +2.3% from -0.7%), which is likely to affect the deflators for various sectors.